The car scrappage scheme won't last forever and the fear in the UK car industry is rising

The extension of the car scrappage scheme sent the Labour Party Conference
wild this week. But beyond the political grandstanding, fears are building
for the long-term health of the UK car industry, writes Graham Ruddick.

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Lord Mandelson won cheers at the Labour Party conference for extending the car scrappage scheme

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Thousands of unsold cars are stored earlier this year at Avonnouth Docks

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Honda workers returned to work at the beginning of June after a four-month layoff

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German Chancellor Angela Merkel visited the Frankfurt Motor Show last month

6:24AM BST 02 Oct 2009

In March this year, the future of viable car making in Britain appeared under threat. Sales were down 30.5pc in the biggest month of the year and major factories, such asHonda in Swindon, were closed.

Since then, the industry seems to have been rejuvenated by the scrappage scheme - which has turned a 30.5pc decline in sales in March into a 6pc rise in August.

Honda’s plant, which employs 3,400, is running again and will next week receive a major boost when it takes on production of one of the Japanese car maker's leading models – the Jazz.

Observers welcomed the move, pointing out that it should take the car market beyond the potentially damaging VAT rise in January.

However, for the long-term health of UK manufacturing, it could prove nothing more than a pointless piece of political grandstanding.

While sales have rallied in the last few months, Lord Mandelson has not dealt with the potentially explosive issue that manufacturers are all pondering – what happens when the scrappage scheme does end?

Without such programmes in the rest of Europe, especially Germany, the impact of a British version is already smothered. While Lord Mandelson is lobbying Angela Merkel, the German Chancellor, on the future of Vauxhall, he would be well advised to try to persuade her to re-introduce her €5bn (£4.6bn) programme, which ended early in September.

Here are some stats to illustrate that the summer revival of the car industry may not last, even with a scrappage extension.

The latest figures from the Society of Motor Manufacturers showed that production in the UK fell back to a 31.5pc year-on-year fall in August. This followed four consecutive months of scrappage-induced improvement from 56.5pc to 23.7pc.

The impact of European scrappage schemes ending was shown by the proportion of cars being produced for the UK market in August rising to a four-and-a-half year high. The size of this percentage – just 33.8pc – says everything about why manufacturers rely so heavily on flourishing overseas market and why a UK scrappage scheme may have a limited impact.

Honda’s plant is now producing more than 300 cars a day, compared to none from February to May. However, while it has sold around 7,000 cars in the UK scrappage scheme so far, just 15pc of those were Civics made in the UK.

Also, stats from the SMMT show that the underlying new car market remains weak.

The 67,006 sales in August was 10,500 behind the total in August 2007 and 15pc below the 78,800 averaged between 1999 and 2008. Without the scrappage scheme, which accounted for 25pc of sales, the underlying market was 21pc down year-on-year. With this in mind, Honda believes 2010 sales in the UK will be below 2009.

The fleet market is a major part of the UK car industry, accounting for more than 50pc of sales, but it has effectively been unmoved by the scrappage scheme. With businesses struggling in the recession, sales were down 22pc down in August.

Finally, and perhaps most worryingly for Lord Mandelson, there is anecdotal evidence that scrappage scheme sales may be slowing. The thought is that consumers who were going to buy cars under the programme, which offers £2,000 to scrap a car of more than ten years old for a new model, have done so already.

If that is the case, then the Government’s extra £100m may be left untouched and the policy left pointless.

New car sales for September, the biggest month of the year alongside March, are released next week. They are crucial and will provide a fascinating insight into the direction of the car industry as it starts to enter a new phase of the recovery - one without multi-billion sales incentives.